The SEC does not provide an official certification to individuals who obtain accredited investor status, nor can you apply to them or anywhere else to get such a certificate. You simply need to meet the criteria established by the SEC about net worth, income, affiliations, or knowledge/certifications. However, do you also need an accredited investor letter to complete the accredited investor verification process?
Reasonable Steps Verification
According to the SEC, under Rule 506(c), the issuer is responsible for verifying that an investor in its securities has accredited investor status. Under 506(c), this may not be done through self-certification which relies on the investor’s word. It must be done by the issuer taking “reasonable steps” to verify the investor’s status.
The methods by which an issuer can verify the investor’s status under Rule 506(c) include verifying that the investor:
• Is an “insider” at a securities issuer (general partner, director, executive officer, or a director, executive officer, or general partner of general partner of that issuer)
• Meets the required yearly income threshold in the last two years – greater than $200,000 USD (individual) or $300,000 USD (jointly with a spouse or spousal equivalent)
• Meets the required net worth threshold – greater than $1 million USD (not counting the value of one’s primary residence)
• Holds certain professional certifications or operates as a knowledgeable employee of a securities firm.
However, the reasonable steps required to verify the status of investors seeking to obtain accredited status by one of the above methods can be cumbersome, especially when the issuer must perform these steps for every potential investor.
Traditional Investor Verification Problems
For many issuers and investors, the accredited investor verification process can be confusing with uncertainty arising about the requirements of the process. Also, since the investor must provide information that proves his/her investor status with every new opportunity, the time and money involved with the duplication of information may cause friction. In addition, the issuer may be strained to manually review the credentials of every new investor.
There is a solution.
The Third-Party Accredited Investor Letter
Under Rule 506(c), an issuer may obtain a letter from a third party that confirms the investor’s accredited status. This letter allows the issuer to take advantage of this “safe harbor” as long as the one signing the letter is one of the following:
• Certified public accountant
• SEC-registered investment adviser
• Registered broker-dealer
• Licensed Attorney
The SEC has not issued specific criteria for what this letter must look like. However, these letters typically include information about the “test” the investor has met, the way(s) in which the person who has signed the letter qualifies as a determiner of one’s accredited investor status, and the date of the evaluator’s review.
Therefore, although an accredited investor letter is not required to complete the process of verifying the accredited status of a potential investor, it can be very helpful in streamlining the process for issuers and ensuring compliance with the SEC.
